News

Trade and the challenges of sustainable development

Making the transition to a low-carbon future as part and parcel of a shift to a sustainable, resource-efficient and green economy

by Ricardo Meléndez-Ortiz, Chief Executive, International Centre for Trade and Sustainable Development (ICTSD)

The world is on its way towards a new and encompassing framework for sustainable development: a new set of sustainable development goals as agreed at the United Nations Conference on Sustainable Development (Rio+20) in June 2012. The agreement is based on a vision for ‘The future we want’. Its viability entails the pursuit of higher levels of human well-being through poverty reduction while avoiding any compromise of the Earth’s life-support systems. To this end, it must build on the United Nations Millennium Development Goals, set to be met before 2015. But the post-2015 vision of sustainable development should also deliver on essential areas such as climate, terrestrial and marine biodiversity, the nitrogen and phosphorous cycles, stratospheric ozone, clean freshwater, healthy and productive land, and avoidance of chemical pollution, ocean acidification and excessive atmospheric aerosol loading.

To respond effectively to such a challenge, an interdependent world needs a deep understanding of the role that trade plays as a connector and enabler of the global economy, and of sustainable development across nations. We know that integrating into global markets through value chains is not enough to spur development opportunities. For trade to lead to equity and sustainability, a combination of domestic policies and international frameworks sensitive to the intertwined dimensions of economic growth, social well-being and environmental sustainability is imperative.

This may sound overwhelming, but, in fact, the world has already started building the regulatory scaffolding and the scientific understanding needed to make all this possible. Many efforts are currently in place to address environmental challenges and to render more sustainable and resource-efficient value chains in agriculture, consumer goods manufacturing and natural resource-based products. This is good news, but it is still largely insufficient; and, in scaling up efforts, priorities must be set. As Martin Wolf, chief economics commentator at the Financial Times, wrote on 14 May 2013: ‘Bequeathing a planet in climatic chaos is a rather bigger concern. There is nowhere else for people to go and no way to reset the planet’s climate system. If we are to take a prudential view of public finances, we should surely take a prudential view of something irreversible and much costlier.’

In fact, we are nearing the irreversible. In May 2013, for the first time in about 5 million years, the concentration of carbon dioxide (CO2) in the atmosphere exceeded the threshold of 400 parts per million (ppm), a level scientifically agreed as critical to keeping global temperatures at life-sustaining levels. This should serve as a wake-up call for us all. Any discussion of policy frameworks for the global economy, whether on investment or trade, should make the pursuit of a prosperous, lowcarbon economy its main priority. For this, focus must also be placed on the need to address the largest source of greenhouse gas emissions – energy supply – not least given that energy is the main driver of economic activity across the world.

Energy-driven growth and development

The challenge of climate-change mitigation is daunting given the current high levels of percapita fossil-fuel energy use in Organisation for Economic Co-operation and Development (OECD) countries. The challenge becomes even more intimidating when coupled with the rapidly growing global demand for energy, driven by increases in wealth and changing consumption patterns in fast-growing developing economies such as China and India. At the same time, the world faces an imperative to provide energy access to millions of people in poorer areas of the world – especially in Africa and Southern Asia – to enable basic survival needs such as cooking and lighting.

Addressing these needs in a way that does not harm the Earth’s climate requires a shift away from fossil fuels towards clean energy sources. At the same time, there is a need to improve the efficiency in the usage of fossil fuels. Currently, fossil-fuel combustion accounts for 90% of total CO2 emissions (excluding forest fires and the use of wood fuel).

The Trends in Global CO2 Emissions Report 2012, by the Dutch Environmental Assessment Agency, shows that in 2011, global energy demand grew by about 2.5%, in line with average growth for the past decade. The consumption of fossil fuels such as oil, coal and natural gas has continued to increase, with oil consumption growing at 2.9%, coal at 5.4% and natural gas at 2.2% in 2011. Coal consumption alone accounted for 30.3% of global energy consumption, which represents the highest share since 1969. While investments in renewables have been growing rapidly for many years, they still account for a small proportion of the overall energy mix. Bloomberg New Energy Finance, which closely monitors investment in the sector, reports that renewable energy has recently hit a period of growing pains due to a combination of factors including aggressive competition and consolidation typical of a new industry, over-production, trade tensions and policy shifts; all this at a time when the extraction of unconventional gas and oil has been booming. Still, up to 70% of new power capacity is expected to come from renewables by 2030.

In order to stabilize the rise in temperatures by 2020, there is a need to limit emissions. The latest analyses in Bridging the Emissions Gap report by the United National Environment Programme (UNEP) estimate a significant gap of about 5 to 9 giga-tonnes of CO2 equivalent (GtCO2e) between the most ambitious reduction pledges and the targets set by scientists.

The figure (below) illustrates the potential for bridging this gap through emissions reductions in various sectors, all related to economic activity and trade. It is clear that replacing highcarbon energy sources with low-carbon ones in the power, industry, transport, waste and buildings sectors is essential.

Trade in a low-carbon economy

A transition to a low-carbon future will require a purposeful architecture of domestic and international regulatory policies and frame frameworks. These will influence prices, public and private resource allocation, and consumption decisions. As such, they would encourage innovation in and the deployment of clean energy and energy-efficient technologies, and discourage the use of fossil fuels. An optimal regulatory framework would involve reform of fossil-fuel subsidies, which represent huge expenditures that artificially lower the price of coal, kerosene and gasoline, and as such create an unequal playing field for cleaner energy sources, such as solar and wind power. Figures from the OECD and the Global Subsidies Initiative (GSI) indicate that current fossil-fuel subsidies, serving as a counter-incentive for reform, remain at about US$ 600 billion each year, three times those provided to clean energy solutions.

Trade policies and regulatory frameworks will play important roles in all climate mitigation policies and frameworks. On one hand, energy has a special significance. While it is tradable like other goods and services, energy is fundamental to agricultural and industrial goods and services. Trade policies act as either barriers or drivers of clean-energy goods, technologies and services as they cross national borders. Clean-energy goods (for example parts and components for wind towers or solar installations), are increasingly produced through complex arrangements for tasks, services, intermediate goods, investment and intellectual property among firms located in various jurisdictions and organized around regional or global value chains. Addressing barriers to trade – from tariffs to standards or beyond-border policies (for example subsidies and local-content requirements) – would enable firms to optimize their global value chains more cost-effectively, significantly contributing to encouraging the necessary scale-up in the global deployment of clean energy.

Well-crafted and transparent trade rules, particularly multilateral ones embodied in World Trade Organization (WTO) agreements will also provide a greater degree of predictability to private actors in the clean-energy sector, encouraging greater levels of investment. This is critical, as it is widely acknowledged that the majority of the resources and investments needed to facilitate a transition to a clean energy future will have to come from the market. Clearer trade rules will also enable governments to determine just how far they can go within their various policy fronts in order to foster increased clean energy use. Such policies may be introduced with the intention of responding to climate change, as well as of achieving other domestic economic objectives, such as ensuring economic growth, increasing competitiveness, fostering industrial development, generating employment and enhancing energy security. These objectives sometimes compete with the need, and often the requirement, for trade agreements to provide non-discriminatory access to clean-energy technology imports from a country’s trade partners.

A lack of clarity on trade rules could conversely result in tensions between a country’s domestic clean energy related policies and trade law obligations. Such a lack of clarity can lead to trade tensions among countries, as is increasingly seen in cases brought to the WTO’s dispute settlement body. Examples include the Ontario Feed-in-Tariff case (Canada versus Japan and the European Union); China’s complaint against solar photovoltaic local-content incentives and related measures in the European Union; and the United States of America’s complaint against India’s local-content measures in the solar photovoltaic sector. Trade friction has also led to domestic anti-dumping and countervailing measures being initiated or considered, for instance, by the United States and European Union against Chinese solar panels, and by China on polysilicon imports from the European Union.

A number of priority issues are at the heart of the trade and clean-energy interface. Within the WTO perspective, there are three ways in which the multilateral trading system could play a more supportive role in facilitating greater deployment of clean-energy technologies:

Addressing measures that restrict trade in the goods and services necessary for cleanenergy supplies, while being mindful of critical developmental concerns.

Enabling greater transparency with regard to measures and policies intended to promote clean-energy but that could also restrict trade.

Improving clarity with regard to existing trade rules that may affect the deployment of clean energy technologies and exploring the need to reformulate rules and new provisions through fresh negotiations on all fronts, bilateral, plurilateral and at the WTO, with a view to ensuring greater predictability for policymakers as well as the private sector, and reducing the likelihood of future trade disputes.

The policy tools and frameworks involved would need to include reviews of tariffs, cleanenergy incentives and subsidies, local-content requirements, trade in services, government procurement policies, clean-energy equipment standards and certification.

The transition to a prosperous, low-carbon economy will be part and parcel of the broader shift to a sustainable, resource-efficient and green economy. A transformation of such magnitude requires an active adaptation of policies concerning all economic activity, from agriculture to manufacturing and services. Towards this end, efforts and policy tools have been creatively devised and successfully introduced over the past 20 years, including fees, taxes, standards, certification and behaviour-shifting incentives. Still, the scale of change achieved thus far is suboptimal, and worthy schemes such as those concerning fair trade, fisheries or timber – even though highly sophisticated – continue to reach an important, yet modest, segment of global or domestic markets. In the future, sustainable trade policies will instead need to reach a level that triggers full-fledged market transformation.